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21 December 2013

Our sweetly naïve financial analysts

“The US economy has flattered to deceive several times in recent years, looking like it was set for a period of faster growth only to fall flat,” said Joseph Lake, US analyst for the Economist Intelligence Unit.

But Mr Lake says he thinks this time is different. “We expect the US to embark on a sustained economic upswing in the coming quarters.”

What evidence is there that it’s not satire? Nothing more than the fact it was published in the Financial Times. One of the most notable characteristics of the age is that the only way to differentiate between The Onion and real news is by looking at the URL.

Why would the “experts” be optimistic? Third-quarter US growth was revised upward from an annualized rate of 3.6 percent to 4.1 percent. That’s “downright impressive” says one of these experts. “The economy gathered momentum steadily since late last year, and economists increasingly expect that momentum to continue into next year,” says another.

What’s driving this exciting growth? Well, as everyone also admits, a big part of third-quarter growth—the biggest part, in fact, about two-fifths of it—was rising inventories. That’s nothing more than a temporal shift forward of the next quarter’s growth to the current one. Admittedly, it’s a good sign, because it means retailers expect to be able to sell the stuff they’re stockpiling. As long as you trust the judgment of retailers.

But what’s actually getting everyone excited is the rise in consumer spending, which was revised upward from 1.4 to 2 percent. It’s hardly a miracle: 2 percent is not really any better than what we’ve seen over the last three years (see the table here, page 6). But the 1.4 percent figure was disappointing and suggested hidden weaknesses for the future; 2 percent is more in line with the thinking among optimists that the recovery, such as it is, will continue.

Curiously absent from the commentary was the question of whether rising consumption spending is sustainable. If people are buying more but not making more money, exactly how strong is this recovery again? Can we think of any lessons we might draw from history?

A quick look at figures from the Bureau of Labor Statistics shows that real hourly compensation actually fell in the third quarter by 1 percent (annualized rate). In the past year, it’s increased only 0.8 percent. This needs no more commentary than to slightly edit a recent headline from The Onion: “Encouraging Economic Report Reveals More Americans Delusional Enough To Start Purchasing Again”.

The compulsions of the labor market have limited my own ability to follow up on this post from the summer. But from the news of the last week—the strong numbers from the US alongside China’s second near-financial crisis in six months—we can see that the pattern is intact: a constant stream of new reasons for optimism paired with the steady emergence of new threats to the integrity of the entire global economy. I’ll leave this quote from that post as a placeholder and hopefully get some time in the new year to return to these questions.

It’s a little sad watching the highly paid financial analysts and economic pundits—not to mention high government officials—try to make sense of these swings. Their dumb surprise at the persistent stagnation dramatizes how conceptually impoverished neoliberal common sense has left them. Every downward lurch they explain by appealing to external disruptions. Every uptick they project forward indefinitely and predict that the recovery is finally here—completely heedless of the last three, four, five cycles of unwarranted optimism.

To them the economy is merely a machine for growth, a completely one-dimensional, one-directional entity whose failure to act in line with its nature can only be ascribed to the unbidden interference of human beings. It never occurs to them that the nature of our society itself may have changed since the crash, because they don’t have the conceptual tools to think in that direction. Even if we allowed them their conceit that the economy is outside society (less a conceit than a first principle), they would still be incapable of realizing that growing volatility is not a result of external forces acting upon the economy but what has become the defining output of the global economy itself.

2 comments:

Regarding rising inventories, another from FT on how "Retailers on both sides of the Atlantic are frantically discounting to save Christmas", and "Discounts of 50 per cent are now the “price of entry” to the market, he says, and some retailers are sending out coupons for 60 or 70 per cent reductions via email."

Also note the headline from the optimistic FT article: "US growth of 4.1% validates Fed move". This reinforces predictions that the Fed will continue with the "taper".